Search

Subscribe to AFM

The American's Creed

I believe in the United States of America as a government of the people, by the people, for the people; whose just powers are derived from the consent of the governed; a democracy in a republic; a sovereign nation of many sovereign states; a perfect union, one and inseparable; established upon those principles of freedom, equality, justice, and humanity for which American patriots sacrificed their lives and fortunes.

I therefore believe it is my duty to my country to love it; to support its constitution; to obey its laws; to respect its flag; and to defend it against all enemies.

Dave Ramsey is notorious for saying that personal finance is 80% behavior and 20% head knowledge. It’s a neat little soundbite but does it make any sense?

I wonder how he came up with it? I was thinking it was 70% behavior and 30% head knowledge. Or, maybe it’s 40% behavior and 60% head knowledge? I joke, I joke. But, I’m curious to know if any of you Dave Ramsey fans know how Dave came up with this little tidbit. If you know, please share.

Perhaps it’s related to the 80/20 principle (also known as the Pareto Principle). According to Wikipedia:

The Pareto Principle states that, for many events, 80% of the effects comes from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. It is a common rule of thumb in business; e.g., “80% of your sales comes from 20% of your clients.”

I don’t think the Pareto Principal applies here because it doesn’t fit this scenario. Dave is saying that 100% of personal finance success is the result of 80% behavior + 20% head knowledge, while the Pereto Principal would say that 80% of personal finance success comes from 20% of something else (behavior or head knowledge).

Obviously you can have all the personal finance knowledge in the world but if you can’t control your behavior you’ll never get anywhere. So, you do have to have both ingredients. I just want to know how Dave Ramsey came up with his soundbite.

As you already mentioned, it’s a neat little sound-bite. It sounds good. Kinda like: “73% of all statistics are made up on the spot.”

In addition, I think he is trying to make the point that people don’t need to have a lot of financial savvy to succeed in managing their finances. Given his penchant for giving out simplistic financial plans, I’d say the saying feeds right into his whole philosophy, whether it’s true or not.

That’s not to say that he completely off. Understanding financial matters and knowing the correct course of action is great, it’s putting them into practice that is, often times, the real challenge.

I think you are right in your analysis of this issue – Ramsey is notorious for trying to “dumb” down things. I am not saying he is wrong because you could have all the knowledge in the world yet still behave badly and/or make dumb decisions. He is just going for effect…

I’m not sure what he means by “Behavior,” if he means “discipline” then I would agree with a statement such as: “Personal finance success comes from 80% discipline and 20% knowledge of the subject matter.” As a matter of fact I would strongly agree with such a statement as discipline in the financial matters is often underestimated. What are your thoughts about this?

The two have nothing to do with one another, but Dave’s point is you have to be disciplined. You could be someone who is a finance major with all the designations and get the same results as someone who only knows to spend less than she makes and save 10% of her pay.

So I doubt Dave said this with any scientific backing, but he just wants folks to know that you don’t have to be a financial genius to do well, just be disciplined.

[…] Speaking of which, JLP wonders is personal finance really 80% behavior and 20% head knowledge? Dave Ramsey often makes this claim, but does it have merit? (I think it’s silly to assign specific numbers to this, but I agree with the basic principle.) […]